09.21 Fed Leaves Interest Rates Unchanged: Where is the Market Going Next?

“Skate to where the puck is going, not to where it has been.”  – Wayne Gretzky

Markets have been volatile the last few weeks as investors attempted to structure their portfolios in anticipation of the Federal Reserve’s rate decision coming out of last week’s meeting. The consensus opinion was a 30% chance of a 25 basis point rate increase with most leaning towards a December increase. It appears that the Fed’s recent commentary has created a good deal of confusion about Fed policy in the short-term.

Last Thursday, the Fed chose to maintain its current Fed Funds rate (0%) which was consistent with the consensus, but managed to surprise a lot of people with some of the wording coming out of the meeting. Specifically, Fed Chair Janet Yellen’s comments in a press briefing regarding the Commission’s concern over “recent global economic and financial developments,” and that the Fed was “focused particularly on China and emerging markets.” China’s GDP is now 3rd of world economies at about 10 trillion, doubling from a decade ago. The U.S. is first at 17 trillion and the Eurozone is second at about 13 trillion. Interesting bit of trivia: Texas has a GDP of about 1.4 trillion, putting it at 14th or 15th in the world – about the same as Spain and Australia.

It is indeed a brave new world. In the past, the Fed hasn’t publicly voiced concerns about events abroad, and global is not a term that has appeared in communications from the Fed. This appears to be an expansion of Federal Reserve policy and will throw several new variables at the markets as they try to digest the implications. The chart below shows the volatility in 10-year Treasury yields year to date.


In the short-term, expect the “puck’s” movements to be rather random and look for market volatility to continue.

James Mathis, Managing Partner, Echelon Investment Management

Photo credit: Jon via Flickr